August 2017 Vol. 72 No. 8
Features
Two Ways Utility Contractors Can Transfer Risk
By Peter Kuntz
Utility contractors face enormous risks in performing their work. These can include third-party liability, environmental, mobile equipment, cyber, workers’ compensation, third-party over-action, commercial auto liability, management liability – and more frequently – first-party property damage/builders’ risk. Yes, it is a mouthful.
However, most utilities in the United States have incorporated almost unlimited risk transfer language in their contracts, subject to the parameters of a state’s statute. On top of that, utilities are inflexible when it comes to negotiating risk transfer and insurance requirements in contracts with contractors. This stringent contractual language requires prime contractors to include the same requirements in their Master Subcontract Agreements with their subcontractors – irrespective, in many cases, of the type of work the subcontractor may be performing.
So how do you better protect your company? The two most common risk transfer methods for a utility contractor are contractual and insurance coverage.
Contractual risk transfer
This method of risk transfer is very important and should be included in all subcontract agreements. Most importantly, it dovetails with the second method – insurance. There are three types of indemnification agreements that can be considered for contractual risk transfer:
Broad Form indemnity is the most favorable for the prime contractor, as it allows the transfer of all liabilities arising out of the contract with the subcontractor, including sole negligence. The problem with this type of indemnity is that many states have anti-indemnification statutes in construction agreements that prohibit its use.
Intermediate indemnity is the form of transfer that is permissible in most states, strikes a fair balance for both the prime contractor and subcontractor, and is looked upon favorably by the subcontractors’ general liability insurer when providing additional insured status for the prime.
Limited indemnity is the least favorable for the prime contractor and is generally not recommended by legal counsel.
Insurance risk transfer
This method of risk transfer is considered the most important for utility contractors. All utilities require, via the contract, that prime contractors provide additional insured coverage on most liability policies including general, umbrella, environmental and commercial auto. Additionally, most utilities require the prime to insure the subcontractors and provide the same additional insured coverage for the utility as the prime is required to provide. The following is a sample of those liability coverages:
General liability – This is the most critical insurance risk transfer policy, as it covers most of the risk exposures a utility contractor will face. The umbrella liability policy is excess over the primary general liability policy. Utilities have generally not been very specific on the form of additional insured coverage the contractor must provide. In many cases, the contract just states that additional insured coverage must be provided. However, it is important the prime contractor be specific on the additional insured form that is required in the subcontract agreement.
For example, additional insured forms CG 20 10 and CG 20 37 edition date October 2001 (10 001) are recommended as the minimum requirement. Various insurance carriers use a proprietary version of this form, as well. This article is not intended to discuss in-depth the entirety of additional insured coverage on general liability policies. The main point is to always include this additional insured requirement in all subcontract agreements.
Environmental liability – Depending on the scope of work the utility contractor is performing, contractors’ pollution liability insurance may be required by the utility. In almost every case, any underground work performed by the contractor may include this requirement. Overhead transmission or substation work may also require this coverage.
In some instances, the utility may obligate the prime contractor to require the same contractors’ pollution liability be provided by the subcontractors. This can create a dilemma for the prime, as the subcontractor may not engage in the scope of work that involves environmental exposure and does not maintain this type of coverage for its practice.
There are no standard forms regarding this additional liability, as it varies by the insurance carrier. It is recommended to use wording similar to the CG 20 10/20 37 10 001 noted previously.
Cyber liability – Many utilities are now requiring cyber liability insurance from prime contractors. Utilities are concerned that an employee of the contractor may gain access to proprietary information and use it in a nefarious way. This coverage requirement is more of a recent development, but the consensus is it will ultimately become standard in most utility contracts. A cyber liability policy is the most effective risk transfer method for this risk.
Commercial Auto
liability – Most utilities require the contractor to provide this liability coverage with additional insured coverage. In the past, this requirement presented a problem, as most insurance carriers took the position it was unnecessary, since the utility was covered under the general liability policy. That is not the case today; it is readily available for the prime and subcontractor to provide the same coverage.
Property/builders’ risk – First-party property coverage is increasingly required by utilities for contractors performing above ground and below ground electric transmission work. This requirement has always been included for contractors performing single-site project work, engineering procurement construction (EPC) or construction engineering (CE), but utilities are frequently requiring this coverage for work.
Utilities have identified the benefit of this first-party coverage, as it eliminates the requirement they prove negligence on the part of the contractor. The challenge for the utility contractor is that underwriters do not like the exposure, so coverage can be limited and expensive.
We all know the risks for utility contractors are enormous. Hopefully, these two risk transfer methods will help minimize your company’s risk.
ABOUT THE
AUTHOR: Peter Kunz, vice president at Assurance, specializes in providing insurance solutions and best risk-management practices to the construction and energy industries. He graduated Magna Cum Laude from Illinois State University with a bachelor of science degree in finance.
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